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Video Game Sales Surge in September

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Video game retail sales jumped significantly in September, primarily driven by higher software sales, which fully offset declining hardware sales in the month. According to market research firm NPD, sales surged 27.0% year over year to $1.08 billion. Sales were significantly up from $521.0 million reported in August and $443.0 million reported in July.

Software sales soared 52.0% year over year to $754.3 million, considerably higher than $293.4 million reported in August and $222.3 million reported in July. The strong growth was primarily driven by robust performance from Take Two Interactive’s (TTWO - Free Report) Grand Theft Auto V, which became the top-selling game of the month.

Electronic Arts(EA - Free Report) August release Madden NFL 25 was the #2 best selling game, pushing Saints Row IV from Deep Silver to the #10 spot. NBA 2K14 from Take Two claimed the #3 position.

Despite declining 13.0% year over year to $183.2 million, hardware sales were much higher than $90.8 million reported in August and $99.4 million in July. Sony’s (SNE - Free Report) PlayStation 3 was the best console in terms of unit sales in the month, ending Microsoft’s (MSFT - Free Report) reign at the top for 32 consecutive months. Nintendo’s 3DS was the bestselling hardware platform in the month.

Digital Games Sales

According to market research firm Super Data, overall digital sales increased 6.0% year over year to $970.0 million in September. This was higher than $846.0 million reported in August but lower than $1.1 billion reported in Jul 2013.

Revenues from social games increased 16.0% year over year to $176.0 million, better than $166.0 million reported in August. Mobile gaming revenues surged 52.0% year over year and increased 14.0% on a month-over-month basis to $266.0 million. Monthly active users were 246 million at the end of September.

Free-to-play revenues were $249.0 million in the month, while subscriber base grew approximately 700K. Subscription based MMO revenues were $82.0 million, down from $88.0 million reported in August. However, subscriber base declined by 300K in September.

Downloadable game content sales decreased 23.0% year over year to $198.0 million in September.  

Our Take

We expect video game retail sales to improve significantly over the next couple of months due to the launch of new hardware consoles from Microsoft and Sony and a host of new game releases such as Battlefield 4 and Call of Duty: Ghosts.

Moreover, higher consumer spending during the holiday season will further boost sales in the near term.

We believe that increasing revenues from mobile and downloadable contents (DLCs) will drive digital revenues going forward. Mobile has strong growth potential due to improving gaming quality, which is a major factor behind higher user spending.

Further, game developers such as EA and Activision Blizzard (ATVI - Free Report) are actively using the digital distribution platform to provide additional downloadable contents for popular titles such as Battlefield and Call of Duty. This will further boost revenues from DLC going forward.

Among the traditional gaming companies, we believe that EA, Activision and Take-Two Interactive have significant growth opportunities due to their innovative product pipeline in the near term. However, market fragmentation remains a major headwind in the near term.

Currently, Take-Two has a Zacks Rank #2 (Buy), while Activision carries a Rank #3 (Hold).

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